Ground Breakers: Fitch says Chile's resource nationalisation policies are a boon for Aussie lithium producers

Chile’s push at nationalising its lithium industry has investors concerned
Fitch says it could give the advantage to Australia and Argentina in lithium investment
Core Lithium up on approval of early works at BP33 underground lithium project

Analysts at ratings agency and commodity forecaster Fitch say Chile’s new plan to nationalise lithium resources from its massive brine operations and mandate the use of environmentally friendly but yet to be commercialised direct lithium extraction techniques will send investment running for Australia and Argentina.

Chile is the second largest lithium producer in the world behind Australia, but is being rapidly chased by its South American neighbour.

Left-wing president Gabriel Boric’s plan for the State to take a majority stake in Chilean brine developments and capture a larger share of profits for the country has had investors in New York listed giants Albemarle and SQM running since it was announced on April 20.

“These concerns will likely push some investors towards other, more market-friendly global producers,” Fitch says.

“Within Latin America, Argentina’s lithium sector regulations are seen as more attractive than those in Chile’s new proposal according to media reports (in contrast to the markets’ typical reputations), with some USD4.3bn in lithium investments announced since 2020.

“Globally, substantial lithium supplies in markets such as Australia could prove more attractive than those in Chile, or manufacturers could explore alternative minerals for use in batteries.”

Is it the death-knell for the once top producer of the battery commodity, where SQM has concessions under management on the Atacama salar until 2030 and Albemarle has contracts in place until 2043?

Not necessarily. Chile’s state-owned Codelco has maintained a leading position in its copper sector for decades while other private players including majors like BHP (ASX:BHP), Rio Tinto (ASX:RIO) and South32 (ASX:S32) have prospered in the country.

“Indeed, Codelco’s involvement in the lithium sector could bring benefits, as its experience as the world’s largest copper company should be valuable in developing the rules and structure of the eventual state-owned lithium company,” Fitch says.

“Recent political developments also suggest that the country’s progressive movement is in retreat, which should keep the current policy framework in place moving forward.

“In this vein, the government’s recently approved mining royalty bill was moderated after negotiations with private companies and centre-right parties, underlining the political constraints on the government’s policies.

“Finally, the government’s new environmental regulations, while unfavourable for production in the near term, could address concerns of local communities and reduce the risk of future protests that disrupt operations in the years ahead.”

Negotiations point the way

The negotiations to extend those contracts with SQM and Albemarle will give a strong sense of the real impacts of the new regulations.

“Possible revisions to the nationalisation plan in congress, as well as general elections in 2025 and 2029, are confounding factors. The market perception of the deals eventually reached between the sides will likely influence the willingness of new players to enter the sector,” Fitch says.

Chile is also looking to harness its strong resource and reserve base to head further downstream into chemical and battery manufacturing.

But Fitch struggles to see the skinny Latin American country competing with Asia.

“Indeed, the government has already granted Mainland China’s BYD preferential prices to make battery-grade lithium carbonate in Chile, with the plant projected to open in 2025,” Fitch’s analysts say.

“If Chile is able to attract substantial investment into manufacturing capacity in addition to lithium extraction, it would offer notable upside to the country’s growth trajectory (we forecast 2.2% growth on average from 2023-32).

“However, as Chile will be competing with more established and deeply integrated manufacturing sectors in Asia, this will likely prove challenging.”

Rising lithium prices take sector higher as bulks, precious metals miners fall

Lithium miners are the standouts this morning as prices again rose overnight amid a now two-week long rebound from 12-month lows.

Fastmarkets prices for lithium hydroxide CIF China, Korea and Japan lifted $2.40/kg or 5.6% to US$45/kg, with battery grade lithium carbonate up 6% to US$35/kg.

At least one hydroxide deal was reported at US$45-48/kg, with the low end of another offer at US$42-43/kg.

It came as lower gold and iron ore prices did a number on the Materials sector, keeping the big miners to a 0.23% loss this morning.

Outperforming, unsurprisingly, were the Aussie lithium plays, with Allkem (ASX:AKE), which is running hot off the back of the Argentinian-Canadian-Australian lithium giant’s $16 billion merger with New York-listed Livent, up 2.61%.

Core Lithium (ASX:CXO) meanwhile gained 5.88% after the $2 billion miner announced an investment decision on its high grade BP33 underground mine would be made by the end of the first quarter of 2024.

A first shipment of spodumene concentrate from its Grants pit, part of the Finniss lithium mine in the Northern Territory, is due to leave for China soon.

Core today announced $45-50m of early works for BP33, which will extend the life at Finniss, on the back of a 131% increase in its mineral resource to 10.1Mt at 1.48% Li2O. Civils will be undertaken by Darwin contractor Northern Australian Civil.

“We are pleased to announce this positive, incremental investment decision that allows initial works to be undertaken while the feasibility study is completed for BP33, our potential next mine at the Finniss Lithium Operation,” Core CEO Gareth Manderson said.

“Core would like to acknowledge the support of the Government of the Northern Territory. We have been able to bring on the Finniss operations at a time in the market when it can deliver benefits for the NT and all its stakeholders due to the professional and efficient processes for approvals. The BP33 approval is another example of this.

“I am pleased the civil works contract has been awarded to a successful locally based business, Northern Australian Civil. NAC currently provides civil construction activities at Grants Operations and is a fantastic local contracting partner which employs local Darwin and NT residents and invests back into the Territory.

“We will continue focus on the safe ramp up of the Grants open pit and concentrate production through the DMS plant. We will aim to provide final project expenditure and other project metrics once we have incorporated the increased resources into our studies by Q1 CY24.”